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Which Countries Export FDI and How Much?

  • Assaf Razin

    (Tel Aviv University)

  • Yona Rubinstein

    (Tel Aviv University)

  • Efraim Sadka

    (Tel Aviv University)

The paper develops a model with ¡§lumpy¡¨ setup costs, which govern the flow of bilateral foreign direct investment (FDI). Every country is potentially both a source for FDI flows to several host countries, and a host for FDI flows from several source countries. But technologically-advanced countries have a comparative advantage in setting up foreign subsidiaries. Thus, the model generates two-way, rich-rich and rich-poor, FDI flows. We employ a sample of 24 OECD countries, over the period 1981-1998. We observe many pairs of countries with no FDI flows between them. Zero reported flows could indicate either true zeros stemming from marginal productivity conditions, measurment errors, or true zeroes that are due to fixed costs (which dominate marginal productivity conditions). Previous empirical literature on the determinants of FDI flows imposes a no-fixed cost assumption on the estimation procedure (Tobit). In contrast, by employing the Heckman selection procedure, we show that the Tobit restriction is not consistent with the data, and yields biased estimates. Controlling for the selection into source-host pairs of countries, and for time and country fixed effects, we find: (1) FDI flows respond positively to advances in host country level of education relative to the source country level of education, whereas the source-country level of education is a predictor of the formation of source-host country pairs; (2) FDI flows respond positively to improvements in host country financial risk ratings relative to the source country ratings; (3) existence of rich-poor pairs hinge on surpassing an education-income threshold, whereas rich-rich FDI flow volumes depend on education and income levels.

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Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 152004.

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Length: 36 pages
Date of creation: Aug 2004
Date of revision:
Handle: RePEc:hkm:wpaper:152004
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  1. Smarzynska, Beata K., 2001. "Pollution havens and foreign direct investment : dirty secret or popular myth?," Policy Research Working Paper Series 2673, The World Bank.
  2. Roberts, M.J. & Tybout, J.R., 1990. "Size Rationalization And Trade Exposure In Developing Countries," Papers 5-90-2, Pennsylvania State - Department of Economics.
  3. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1994. "Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach," NBER Working Papers 4887, National Bureau of Economic Research, Inc.
  4. J. M. C. Santos Silva & Silvana Tenreyro, 2003. "Gravity-defying trade," Working Papers 03-1, Federal Reserve Bank of Boston.
  5. Lucas, Robert E, Jr, 1990. "Why Doesn't Capital Flow from Rich to Poor Countries?," American Economic Review, American Economic Association, vol. 80(2), pages 92-96, May.
  6. Fernando A Broner & Guido Lorenzoni & Sergio L. Schmukler, 2015. "Why Do Emerging Economies Borrow Short Term?," Working Papers 308, Barcelona Graduate School of Economics.
  7. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
  8. Assaf Razin & Ashoka Mody & Efraim Sadka, 2003. "The Role of Information in Driving FDI Flows: Host-Country Transparency and Source-Country Specialization," IMF Working Papers 03/148, International Monetary Fund.
  9. Maurice Obstfeld & Alan M. Taylor, 2002. "Globalization and Capital Markets," NBER Working Papers 8846, National Bureau of Economic Research, Inc.
  10. Amiti, Mary, 1998. "Inter-industry trade in manufactures: Does country size matter?," Journal of International Economics, Elsevier, vol. 44(2), pages 231-255, April.
  11. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2003. "Export versus FDI," NBER Working Papers 9439, National Bureau of Economic Research, Inc.
  12. David L. Carr & James R. Markusen & Keith E. Maskus, 1998. "Estimating the Knowledge-Capital Model of the Multinational Enterprise," NBER Working Papers 6773, National Bureau of Economic Research, Inc.
  13. Loungani, Prakash & Mody, Ashoka & Razin, Assaf, 2002. "The Global Disconnect: The Role of Transactional Distance and Scale Economies in Gravity Equations," Scottish Journal of Political Economy, Scottish Economic Society, vol. 49(5), pages 526-43, December.
  14. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
  15. Barry Eichengreen & Douglas A. Irwin, 1996. "The Role of History in Bilateral Trade Flows," NBER Working Papers 5565, National Bureau of Economic Research, Inc.
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